Equitable Distribution of Marital Assets

Equitable Distribution and Valuation of Marital Assets under New York’s Domestic Relations Law

In general, under New York law, the property that was acquired by either or both spouses during their marriage, and before the execution of a separation agreement or the commencement of a divorce action, is considered “marital property,” regardless of the form in which title is held. (§ 236(1)(c), NY Domestic Relations Law).

Particularly in light of the extreme market fluctuations of recent years, the date as of which a particular item is valued can have extraordinary consequences. Moreover, because contested divorces in New York can be litigated for several years, a particular asset’s value as of the date that a divorce action is commenced may differ considerably from its value as of the date of trial.

In most cases, New York courts apply an active/passive test to determine the valuation date of a particular asset. The test was described by the Court of Appeals as follows:

In attempting to select a suitable valuation date, some courts have drawn a distinction between “active” assets (i.e., those whose value depends on the labor of a spouse) and “passive assets” (i.e., those whose value depends only on market conditions). These courts have concluded that “active” assets should be valued only as of the date of the commencement of the action, while the valuation date for “passive” assets may be determined more flexible (see, Smerling v Smerling, 177 A.D.2d 429 Page 288; Heine v Heine, 176 A.D.2d 77; Zelnik v Zelnik, 169 A.D.2d 317; Kallins v Kallins, 170 A.D.2d 436; Greenwald v Greenwald, 164 A.D.2d 706).

McSparron v. McSparron, 87 N.Y.2d 275 (1995). In McSparron, the Court of Appeals cautioned that active versus passive distinction was a guidepost and might, in certain cases, not be the appropriate litmus test. Id. Nonetheless, the active/passive test with regard to post-commencement fluctuations in value is, without question, the most common standard applied by New York trial and appellate courts.

Recently, the Appellate Division for the Second Department reversed a lower court decision which valued certain business entities as the commencement date. Morton v. Morton, 69 A.D.3d 693, 892 N.Y.S.2d 518 (2nd Dept. 2010). In Morton, the Appellate Division held that in the absence of evidence that the fluctuation occurred as a result of wasteful conduct by the defendant, the trial court had “improvidently exercised its discretion in valuing these assets as of the date of the commencement of the action rather than as of the date of trial.” Morton v. Morton, 69 A.D.3d 693, 892 N.Y.S.2d 518 (2nd Dept. 2010).

In summary, the issue of whether a particular asset constitutes marital property is just the beginning of the equitable distribution analysis. Every New York divorce attorney and litigant must also give careful attention to the manner in which each asset is valued.